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Experts claim that businesses are at risk of pillar one double taxation.

Digital services taxes have been implemented internationally, but pillar one seeks to replace them. However, companies worry that tax authorities would not keep their promises.

Tax experts claim that if governments do not keep their word and eliminate the tax on digital services, corporations would be subject to double taxation under pillar one.


Some tax specialists are concerned that once pillar one is in place, governments may not want to give up the income stream given the proliferation of DSTs globally.


These opinions are in response to worries that, since since the effects of the COVID-19 epidemic and the Russia-Ukraine war, the weakening of the world economy has made governments dependent on this tax revenue to fill budgetary gaps.


Large multinational corporations with annual revenues of over €20 billion ($19.2 billion) will be subject to pillar one. According to Marta Pankiv, head of group tax and transfer pricing (TP) at Vienna-based software business Tricentis, this means that around 100 enterprises throughout the globe will be included in the purview of pillar one.

The impact for businesses that would fall outside of pillar one is that "governments will not be willing to give up on the revenue that they are  now generating from digital services taxes," according to Pankiv.


Despite promises to do so, she is skeptical that revenue services would also eliminate DSTs for smaller businesses. According to Pankiv, "This can only happen for large multinationals."


Given that DSTs have a lower threshold than pillar one, the majority of businesses are likely to keep paying them. DSTs will still be in effect, and double tax agreements will not apply to them, according to Pankiv.


The problem with DSTs is that since they are a tax on gross revenue, they are not considered corporate income taxes. Since they are sunk expenses, they are not covered by double tax treaties and businesses cannot seek credits for their overall Amount A tax liability.


According to Pankiv, this results in double taxation since the money made in Malaysia is then subject to DSTs for the Malaysian portion while simultaneously being taxed as part of your overall income in Europe.


According to Vikram Chand, a legal expert at the University of Lausanne in Switzerland, DSTs may still be imposed on businesses that do not meet the suggested level even if pillar one is effectively implemented internationally.


But, he continues, this ought to be avoided.


"DSTs could lead to double taxation," according to Chand.


While pillar one could provide some firms with protection, DSTs put them at risk of paying double taxes in the home country of the multinational.


These problems have prompted proposals for the two-pillar OECD solution to be simplified.


Even while the two-pillar method is essential, few tax professionals would disagree that the regulations should be made simpler, particularly in light of their potential to affect tax policy.


According to Pankiv, the OECD initiative could appear to be simple to apply for on the surface. This, however, conceals a far more difficult TP problem with allocating profits.


According to her, several businesses have already created lists containing well over 100 topics that authorities must clarify before they can implement pillar one.


The main lesson, according to Pankiv, is to make rules as clear as possible since this will make it easier for people to comply with them.


The risk that these intricate regulations pose to revenue services and regulators' tax revenues is another thing to think about. According to Pankiv, calculations and instructions that are simple to follow have been shown to boost tax compliance rates.


The necessity for streamlining the laws is emphasized by Benoît Labiau, EMEA head of tax and treasury of medical technology business Terumo Europe in Brussels.


"It [two-pillar solution] remains very complex and I believe that the policymakers underestimate the complexity of applying such rules within companies," according to Labiau.


Many businesses would have to contend with the difficulty of ensuring they have the proper internal compliance procedures in place in addition to complying with national and international legislation.


Additionally, tax professionals have argued for the expansion of pillar one. These experts contend that this may be required to preserve a fair tax system in a setting of intense corporate competition.


This would include reducing the 10% profitability requirement and the bar for capturing companies with revenues under €20 billion. According to Chand, neutrality must be a fundamental component in the creation of pillar one regulations.


This entails making sure that certain multinationals are not mistakenly disadvantaged while others are penalized by threshold limitations.


"If you stick to the €20 billion, one might say it is obnoxiously high as it applies to only the top 100 or so multinationals in the world," claims Chand.


He continues by saying that the €750 million cap in pillar two appears more acceptable.


Chand uses the instances of major international corporations that are lucrative but do not come under pillar one as illustrations of this seeming imbalance in the system.


Regarding the OECD's intent to reduce the threshold, Chand notes that "profitable digital businesses are outside of the scope of these rules despite being a very profitable company, but its revenues are below €10 billion."


Following a review that is anticipated to begin 7 years after Amount A enters into force, the OECD is anticipated to decrease the barrier to cover companies with sales of €10 billion.


The OECD should drop the barrier even further, to $750 million, according to Chand, so that it corresponds with pillar two. This would guarantee that the two-pillar solutions are converging.


A lot depends on pillar one's success. If it fails, there is a chance that many nations will continue to use unilateral action on a global scale.


According to Chand, "They [DSTs] are one of the worst taxes around and should be switched off. But the reality is that many developing, as well as developed, countries just will not switch them off especially when there is no agreement."


DSTs, according to him, should be eliminated for everyone since they are not fiscally neutral tax policies. Multinationals may incur greater compliance expenses as a result of unilateral actions, and DSTs tax businesses based on gross rather than net profits.


Chand predicts that the future will be highly chaotic if the pillar one project fails. Unanimous levies, DSTs, or other comparable taxes will be widely enacted.


However, if only to prevent the confusion of inconsistent and out-of-date national legislation, governments would still be wise to adopt pillar one, according to sources. The OECD initiative still looks to be the greatest alternative for a consistent worldwide tax policy, notwithstanding its flaws, which must be addressed.

By fLEXI tEAM

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